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Business News/ Market / Mark-to-market/  Sugar exports: a band-aid instead of reforms
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Sugar exports: a band-aid instead of reforms

A compulsory export mechanism for Indian sugar is another bearish signal for global sugar prices

Linking the cane procurement price to that of sugar is the reform that can truly make the sector investment worthy. Photo: BloombergPremium
Linking the cane procurement price to that of sugar is the reform that can truly make the sector investment worthy. Photo: Bloomberg

When the sugar sector and the government parted ways in 2013, with just a few loose ends to be sorted, everybody hoped it would be a clean separation. But just one failed reform—linking the sugarcane purchase price with the market price of sugar—is undoing all the good work. The latest support band-aid is a compulsory sugar export mechanism for mills, to export 4 million tonnes of sugar by September 2016.

The industry hopes that sending 14% of output outside the country will reduce domestic stocks and support prices. But exports are feasible for coast-based producers and not for mills in a large sugar producing but land-locked state such as Uttar Pradesh. So the government is also allowing individual mills to trade their export quotas. Mills in coastal states such as Maharashtra and Tamil Nadu will then be able to buy these quotas.

But quotas alone may not be good enough. The Indian Sugar Mills Association’s statement welcomes the move, but qualifies it by saying that sugar exports are unviable at current prices. In the past, the industry had sought and got export subsidy on raw sugar exports. Whether the government agrees to extend and increase these subsidies, and allow them for white sugar, too, remains to be seen.

Worse, a compulsory export mechanism for Indian sugar is another bearish signal for global sugar prices. But the global sugar market is expected to see a deficit in the season ending September 2016. Since inventories are high due to years of high output, that’s expected to keep a lid on price increases. The latest update from Brazil’s sugar association, UNICA, indicates the country’s sugar output has declined by 8.3% in the current season, as of the second half of August.

In India, the area under sugarcane cultivation is at the same level as last year, as of 11 September. Poor monsoon may affect the quantity and quality of harvest, so post-monsoon updates should give a better picture. But this is not all. There is still the matter of how much mills are willing to pay for cane, versus what the farmers want. Mills will seek more concessions and refuse to crush cane till they get it. This annual affair will play out over the next few months.

Though sugar shares have firmed up a bit in the past week on news of the quota, investors should have become wiser by now. The industry’s dependence on the government makes for a weak investment case. Further, there is a long-term risk that if sugar prices increase—because of, say, a continued deficit in global sugar output—then the government may feel it has the moral right to impose controls, to lower prices. What it gives, it can take away, too. Linking the cane procurement price to that of sugar is the reform that can truly make the sector investment worthy.

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Published: 20 Sep 2015, 08:27 PM IST
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